Mortgage Loan: PITI Explained

If you are shopping for a mortgage loan you have probably seen the acronym PITI in many of the loan offers you receive. PITI stands for principal, interest, taxes, and insurance. Here is what you need to know about PITI.

Principal

Mortgage principal is the total balance of your loan. When you make your monthly mortgage payments you are gradually paying down this balance along with the interest due for that month. Mortgage loans are front loaded with interest so in the early years of your mortgage you will find very little of your mortgage payment is being applied to the principal loan balance. The interest paid on any given month is based on the outstanding principal balance; as the years go by more of your payment is applied to the principal balance and less is paid to the lender as interest.

Interest

Interest is what you pay the lender for loaning you the money to pay for your home. The interest is a percentage of the principal balance due. Interest rates come in two flavors: fixed rates that do not change over the term of the loan, and adjustable interest rates that change at regular intervals set in your loan contract. If you have an adjustable rate mortgage your interest rate is tied to some financial index plus the lender's markup. When the lender periodically updates your interest rate the amount of your monthly mortgage payment will change with it.

Taxes

Property taxes are often included in your monthly payment amount. Lenders do this to protect their investment in your home; if you allow your property taxes to lapse, your State or local government could put a lien on your home. If this happens the lender would be unable to foreclose if you fall behind on your payments.

Insurance

Your homeowner’s insurance policy protects your home from damages. Insurance premiums can be rolled into your monthly payment like property taxes; again, lenders do this to protect their interest in your property. Most homeowner’s insurance policies only protect your home against fire, vandalism, and certain other damages. If you live in an area prone to flooding the mortgage lender could require you to purchase flood insurance in addition to your homeowner’s policy. Mortgage lenders may require borrowers with poor credit or low down payments to purchase Private Mortgage Insurance in addition to their homeowner’s policy. Private Mortgage Insurance protects the lender from loses in the event of foreclosure. This insurance does nothing to protect you, the homeowner.

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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing: What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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